Overseas investment trusts offer exotic income sources and can act as counterweights to UK-centric risks.
Most of us like to holiday abroad at least once a year, in search of something different or more exciting. Increasingly, income-seekers are also inclined to venture overseas, where they can now choose between a variety of equity income trusts.
The attractions of adding overseas equity exposure to an income portfolio are highlighted by Ben Lofthouse, manager of Henderson International Income (LSE:HINT).
He points out that international dividends are growing faster than UK dividends. Notably, dividends in Asia ex Japan achieved 164% growth over the nine years to October 2018, dividends in Japan grew by 158% and those in North America by 153%.
What's more, overseas dividend payers offer useful diversification, in the form of exposure to industry sectors different from those on offer in the UK (notably mature technology companies) as well as atypical regulatory and political risks, for example.
The latter could be particularly welcome as UK regulation of traditional income sectors such as utilities becomes tighter, especially given that a change in government could accelerate this process.
The Henderson trust is different from other global equity income trusts in that it excludes the UK from its remit, so it can serve as a good complement to a UK equity income trust.
It trades at a small premium to NAV and its shares yield 3.5%, paid quarterly.That's just below the 3.9% average for UK equity income trusts and the 4.1% average for its own sector. But the trust's annual dividend payments have grown at an above-average 4.9% annually over the past five years and are supported by reserves equal to 71% of last year's payout. What's more, the trust's five-year NAV total returns are currently nearly twice as good as the average in the UK equity income sector, and above average for the global equity income sector.
The Scottish American Investment Company (LSE:SCAM) and JPMorgan Global Growth & Income (LSE:JPGI) currently boast the best five- and 10-year NAV total returns in the global equity income sector. Scottish American has grown its dividend by only 1.8% over the past five years, and currently yields 3.7%. That contrasts with the handsome 4.8% yield from JPGI.
The snag with JPGI is that, like a number of other JPMorgan-managed trusts, it has an 'enhanced income'. In JPGI's case, its board is committed to paying quarterly dividends equal to at least 4% of NAV at the start of each financial year, funding them from capital as well as revenue.
The link to NAV means its dividends are liable to go down in difficult markets, so they are less predictable than those from most traditional income trusts, which put some of their revenue aside in good years in order to maintain a progressive dividend policy in harder times.
Against that, JPGI's enhanced approach allows manager Jeroen Huysinga to continue to invest in whichever companies he and his team believe offer the most promising total returns, with little regard to their yield. This allowed the trust to achieve much better returns than any other global equity income trust when the bull market was in full swing.
Murray International (LSE:MYI), which is much the largest global equity income trust, offers a 4.4% yield, paid quarterly, and is committed to a progressive dividend policy. Its total annual dividend has more than doubled over the past 10 years. It has been covered by earnings in seven of those years. Minor shortfalls have been met from revenue reserves, which are currently equal to 1.14 times last year's dividend.
Murray International has been held back in recent years by manager Bruce Stout's longstanding preference for companies capitalising on fast-growing economies in Asia and emerging markets, his relatively low weighting in the US and his generally cautious approach –in response to his concerns about world growth and indebtedness. But Murray International is well-liked by brokers such as Canaccord Genuity and Peel Hunt, which favour Stout's high-conviction, low-turnover approach and his focus on companies with quality managers, strong balance sheets and good corporate governance.These served the trust well in the second half of 2018, helping restore its premium rating.
As far as regional trusts are concerned, only a couple of European trusts offer an attractive income. European Assets (LSE:EAT) 6.1% yield is much the highest, but like JPGI's, it is 'enhanced', in that its dividend is set at 6% of NAV per share at the start of each financial year and funded from capital as well as income. A steep fall in the trust's NAV in 2018 means the dividend for 2019 has been cut by about 20% in sterling terms.
However, it is still high for an equity trust. Manager Sam Cosh has achieved above-average returns in the European smaller companies sector over the past five years, and index-tracking funds will have to buy European Assets shares when it moves from the Euronext exchange to a full listing on the London Stock Exchange in March, so brokers such as Numis have made the trust a 'trading buy'.
The income pool of JPMorgan European Income (LSE:JETI) relies mainly on dividends for its revenue, although its revenue reserves have recently been bolstered by swapping some of its capital reserves for the retained revenue reserves of the growth-oriented pool of the same trust. The two pools have had the same managers since 2006, but the income pool has achieved much better three - and five-year total returns than the growth pool, albeit these are about average for its sector.
Following a dull period for the dividend, paid quarterly,it has grown by an average of 5.6% a year over the past five years. Shares are on a double-digit discount.The yield is 4.3%.
Asia ex Japan trusts are interesting. On the one hand, three well-established equity income trusts are on offer that fund growing dividends out of revenue and deliver yields of between 3.9% and 6.4%.
On the other hand, for those willing to take the 'enhanced' payout route, there is JPMorgan Asian (LSE:JAI), where the yield has jumped to 4.4% as a result of it adopting an enhanced dividend policy and a commitment to pay out the equivalent of 1% of assets per share per quarter.
There is also Martin Currie Asia (LSE:MCP), which doubled its dividend payments in 2017 when it decided to make a 2% NAV capital payment with the final dividend. As a result, its yield, which is paid in two tranches, is also 4.4%.
Of the three conventional Asian income trusts, Schroder Oriental Income (LSE:SOI) has much the best long-term NAV returns, but it trades at a premium and has the lowest yield, at 4%. Aberdeen Asian Income (LSE:AAIF) has been attracting interest recently, as its well-established quality-oriented approach has been working better than it had been.
As a result, its three-year NAV returns are similar to Schroders' and better than those of the more highly rated Henderson Far East Income (LSE:HFEL), which yields 6.4%. Aberdeen's shares trade at a 6.6% discount and yield 4.4%, but its five-year dividend growth of 2.7% has been lower than Schroders' 4.9%.
With the S&P 500 index yielding just 2%, the US is short of tempting higher-yielding trusts. Shares in BlackRock North American (LSE:BRNA) yield 4.6%, as a result of the board's adoption of an enhanced dividend policy in November 2017.
This involves paying a dividend of 2p a quarter, of which around a quarter is expected to be funded from capital. Disappointingly, BlackRock's three- and five-year NAV returns are well below average for its sector. Aberdeen Standard-managed North American Income Trust (LSE:NAIT) has a better NAV record, but its yield is just 2.8%.
Emerging market target
Global emerging and frontier markets offer more scope for income-seeking investors.The MSCI Frontier Markets Index has a 3.5% yield, and both BlackRock Frontiers (LSE:BRFI) and the much newer Jupiter Emerging & Frontier Income (LSE:JEFI) yield more than 4%. JPMorgan Global Emerging Markets (LSE:JEMI) has the highest yield of the mainstream emerging market trusts, at 3.9%, paid quarterly. Its three- and five-year NAV returns are broadly in line with the MSCI Emerging Markets index but less impressive than those from its sister trust, JPM Emerging Markets, which is not inhibited by income requirements.
Income-focused trusts offer some attractive opportunities, but investors should be aware that targeting income sometimes entails missing out on the most exciting capital growth opportunities. On the plus side, investing in shares with an attractive yield can help protect portfolios from big stock market setbacks.
Just as important to note is the fact that treating dividends as money to be spent rather than reinvested - which may be necessary for some investors - will seriously compromise longer-term total investment returns.
Attractive yields from overseas trusts
|Trust||Share price (p)||Disc/prem (%)||Yield (%)||NAV total returns (%) over:|
|1 year||3 years||5 years|
|Global equity income|
|Henderson International Income||156||1.9||3.5||-1.4||39.6||59.1|
|JPM Global Growth & Income||308||2.8||4.8||-3.7||53.2||68.9|
|Murray International Trust||1,172||3.8||4.4||-0.4||45.4||51.5|
|Scottish American Investment Co||370||4||3.7||2.9||53||72.4|
|Europe ex UK|
|JPMorgan European Income||144||-10.8||4.3||-3.2||41.9||51.8|
|European Assets Trust||98||-7.7||6.1||-8.1||29.8||50.8|
|Asia ex Japan|
|JPM Asian Trust||350||-7.7||4.4||-2.4||83.3||93|
|Martin Currie Unconstrained||378||-11||4.4||-0.6||54.9||56.9|
|Aberdeen Asian Income||206||-6.6||4.4||-1.3||47.3||48|
|Henderson Far East Income||343||2.4||6.4||-3.4||45.8||56.2|
|Schroder Oriental Income||247||1.8||4||-0.9||48.8||73.3|
|BlackRock North American Income||172||2.5||4.6||3.2||46.9||78.5|
|North American Income||1,425||-0.3||2.8||8.9||62.9||103.6|
|JPM Global Emerging Markets Income||129||-1.3||3.9||-3||61.2||53.1|
|Jupiter Emerging & Frontier Markets||100||4.2||4.2||-9.4||n/a||n/a|
Source: Numis Securities, as at 28 February 2019
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.